What is an OIS and # of cashflows
Overnight Indexed Swaps: an agreement to exchange fixed with a floating realised overnight rate. If <1y, only 1 cf, if >1y, cf every 3 months.
Why spread between fixed and floating rate loans are high?
In a floating rate, lender can reset the terms of the loan or even deny lending based on credit rating.
Paying low and high interest rate currency cashflows values
When you pay low IR, you receive more in the start but then gets negative
Valuation of swap in-terms of BP
V = Bd - S0Bf
Bd = value of bond defined by domestic cfs,
Bf = value defined by foreign currency cfs in foreign currency,
S0 = spot exchange rate
V = value of swap in $
What is a CDS
CDS is like an insurance against a default. Buyer of credit protection pays regularly until maturity or default by reference entity.
What is Swap rate
Average of bid ask fixed rates that a market maker is prepared to exchange for reference rate.
Value of floating rate bond?
Next cf + principal discounted to present.
When does money exchange hands in a swap vs an FRA?
FRA: start of the accrual period
Swap: end of the accrual period
